11 August 2009

Raising the Debt-Ceiling Will Impress Our Lenders?1

On August 5th, I wrote about the three possibilities for Congress to deal with ballooning expenditures and debt: '... there are only three options available to he and to the Congress: cut spending (not going to happen with all the continued spending proposals), allow the debt to balloon to the point where we create long-term stagflation (which will kill any possibility of a second term), or increase income in the form of taxes.' In that same post I also discussed Treasury Secretary Geithner and Larry Summers floating the idea of raising taxes on all but the poor. Now Geithner wants Congress to pick door-number two, requesting that it raise the debt-ceiling from $12.1 trillion (where it was set to accomodate the stimulus package) to an as yet undetermined amount. The annual deficit expanded to $1.3 trillion in the first six months of the year, and is expected to hit $1.8 trillion by October when we also are expected to reach the current debt ceiling.

Geithner's argument? '"It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Mr. Geithner said in the letter.' This request is already raising a debate about the effectiveness of the debt ceiling and the message we send to our lenders:

'"It's a clear that we've got a sign that we've got a federal government that is out of control from the fiscal standpoint," said Rep. Tom Price (R., Ga.), who leads the conservative Republican Study Committee in the House. "I don't see how anyone can vote in favor of an increase in the debt ceiling and say they're doing it is a responsible way." Robert Bixby, executive director of budget watchdog the Concord Coalition, said the debt ceiling has little practical application in curtailing government spending. "You can't not raise it, because if you do, the Treasury in effect would be defaulting on the debt, which would be crazy," Mr. Bixby said. "It doesn't really provide a whole lot of restraint."'

Continuing down this road of out-of-control deficit-spending may very well force us through both increased taxes and the type of debt cycling we experienced in the late 1970s and 1980s. During that period, deficit loads increased dramatically enough that the nation was forced to print money, devaluing the currency and helping to create stagflation. What a legacy that would be. Further, there is no particular reason why increasing the debt-ceiling while failing to reign in spending will reassure our lenders (particularly China which has expressed increasing concern over our current fiscal policy). Congress and the Obama Administration may be collectively pushing us into a situation from which there is no clear or easy return.

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